Can Social Networks Help You Get A Loan? Lenddo Thinks So

Companies like Facebook, Twitter and LinkedIn have made social networks central to the way people communicate. A start-up called Lenddo wants to make them central to the way people borrow money in the developing world.

The company, backed by Facebook investor Accel Partners, provides small loans to people based on the strength of their social contacts, believing that having online friends vouch for a person’s trustworthiness increases the odds a person will pay back a loan.

Lenddo’s algorithm considers how many social media accounts applicants have linked to their loan application, how long those accounts have been active, and how many friends or followers they have on their social networks.

The company’s algorithm also evaluates an applicant’s “trusted network”—the people in an applicant’s social network that are closest to them and will vouch for their reputation and character. If a person is approved for the loan, the trusted network is kept informed of a person’s payment history, and paying back a loan on time improves a person’s “Lenddo score,” as well as the score of their trusted network. The transparent, peer-based system encourages repayment, the company says.

Lenddo loan amounts can be up to around one month’s salary, to be paid back within three to 12 months. Loans must be taken for the purposes of life improvement–borrowers have sought to move closer to a job, send relatives to school and help their families with medical treatments.

If a debtor can’t make a payment, they’re supposed to contact Lenddo to work out a solution. If Lenddo can’t contact them or can’t come to an agreement, the company pursues legal action to recover the money. The company says it charges interest rates that are generally below what local credit card companies charge.

The company is targeting countries where access to traditional financial services is slim. So far it’s operating in the Philippines and in Colombia and has identified 35 countries where people are heavy users of Facebook and are part of the emerging global middle class. Chief Executive Jeff Stewart estimates this group at 1.2 billion people.

“To a typical financial institution, these people are completely unknown, but to their communities they’re very known,” Stewart said. “…You tend to be friends online with people who are actually your friends.”

Stewart said he and his co-founder, Richard Eldridge, got the idea for Lenddo two years ago after they noticed that people in the Philippines at a previous project they were working on had trouble getting loans, even though they were hard workers and had gone to the best schools.

They also noticed that people who borrowed small amounts of money to lift themselves out of poverty, in a technique known as microfinance, nearly always paid the loans back–the payback rate was 98%.

Figuring that borrowers would pay back loans if they had something at stake because they were known in their communities, the two created a software platform that uses algorithms to predict applicants’ trustworthiness even when they don’t have access to credit scores and other modern financial instruments.

People who say they are architects, for instance, are likely to have friends who are architects, Stewart said, and people who say they are trustworthy are likely to have trustworthy friends.

This month the company raised $8 million in funding from investors including Accel, Blumberg Capital, Omidyar Network, iNovia Capital and Metamorphic Ventures.